Consider a 9-month forward contract on 100 shares of stock when the stock price is $100. We
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Question:
Consider a 9-month forward contract on 100 shares of stock when the stock price is $100. We assume that the risk-free interest rate continuously compounded is 10% per annum for all maturities. We also assume that dividends of $3.00 per share will be paid after six months.
A. What should be the equilibrium forward price per share now?
B. What arbitrage opportunity is possible if the forward price for the contract is $110?
F0=$110>F0*=$104.71: overpriced forward (underpriced spot asset)
Today: short forward & long spot asset by borrowing
Before & at maturity:
Expert Answer:
A To calculate the equilibrium forward price per share we need to consider the cost of carrying the ... View the full answer
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Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Posted Date:
